Review how much VAT charged on sales?

Mixed supplies

A mixed supply challenge occurs if your business sells goods or services for a single price and they consist of at least two separate elements which are subject to different rates of VAT. For example, the sale of a package consisting of a pen (standard-rated) and a book (zero-rated) is a mixed supply of goods; a boat ride (zero-rated) which includes a meal (standard-rated) is a mixed supply of services.

You must first decide if both elements of a mixed supply are significant in their own right. If so, you must apportion the sales so that output tax is paid on the standard-rated part of the supply. However, if one or more parts of the package are incidental, they can be ignored, i.e. output tax is only payable on the main supply. You can apportion the output tax on a mixed supply by using any method that is fair and reasonable; no method is prescribed in law.

HMRC favours a method which uses the individual selling prices of each component in a mixed supply bundle. However, that might not be possible if you only sell the items together in a package and not on a standalone basis.

Example. Billy is registered for VAT and sells washing machines. Each sale includes the machine (standard-rated) and a detailed 60-page manual explaining how to operate it (zero-rated). The manual is incidental to the machine and its purpose is to enhance a customer’s enjoyment of the main supply, so that the machine works properly. Output tax is payable on the full selling price.

Example. Freverton Boat Company charges £35 per person for a two-hour boat trip (zero-rated) which includes a three-course meal (standard-rated). Both parts of the supply are important, so output tax must be apportioned.

When you work out your apportionments, ensure that you use VAT-inclusive figures if you use a cost-based method because your subsequent sales will also include VAT.

Recent case: the issue?

A recent Tribunal case involved a business that wrote biographies for its customers, and then carried out a publication, printing and editing process to produce four hard-copy books for the customer. HMRC said that the supply was for a standard-rated “ghost writing” service whereas the taxpayer claimed they were selling zero-rated books.

HMRC reached its conclusion because the predominant cost of the supply was the fee to the author who did the writing. However, the judge agreed with the taxpayer that this approach was flawed. The priority is to consider two issues:

1. Customer perception: what do your customers expect to receive when they part with their cash?
2. Contracts: what does the contract agreed and signed by your customers say? In this Tribunal case, the contract clearly stated that the taxpayer supplied its customers with hard-copy books to share with family and friends, and books are zero-rated.

When you consider them for your own sales, these two questions should produce the same answer in terms of what you are supplying to your customers and how much VAT should be charged.